Why Amazon's Attempt to Reinvent Supermarkets Broken the Golden Rules of Retailing

Jeff Bezos had a golden rule for deciding whether Amazon should make the big leap from the internet to the high street. “We would like to [open physical stores], but only if we have a truly differentiated idea,” he said in a 2012 interview. “We want to do something unique for Amazon.”

Since then, the company has repeatedly tried to reinvent the supermarket. In 2016, the company opened a cashier-less store on the ground floor of its Seattle headquarters, using cameras and artificial intelligence to track what shoppers pick from shelves.

The following year the company paid $13.7bn (£11bn) for luxury grocer Whole Foods. And in 2020, it launched its own Amazon Fresh range of high-tech supermarkets in the US, before expanding into the UK.

But despite becoming the world's dominant online retailer, Amazon's nearly decade-long attempt to reinvent the supermarket has stubbornly remained an ambition rather than a reality.

Over the past five years, the company's overall revenue has more than doubled thanks to next-day delivery, and nearly endless choice has led to a surge in online shopping.

In contrast, sales from physical stores grew by only 16%. They accounted for just 3.5% of Amazon's total sales, down from 7.4% in 2018. At the same time, the number of physical stores over the past two years has decreased from 679 to 628.

Earlier this month, Amazon's shopping ambitions were further scaled back as the company said it would stop using checkout-less Just Walk Out technology in its US supermarkets.

The technology was supposed to automate drive-thru cashiers by using cameras and sensors to track what people take from shelves. But as it turned out, the company still relied heavily on human labor: According to tech news site The Information, Amazon still required an army of more than 1,000 remote workers in India to review purchases, in most cases using human judgment. cases.

An Amazon spokesperson disputed this, saying: “Incorrect reports that Just Walk Out technology relies solely on human reviewers watching from afar are untrue. Most artificial intelligence systems, including the underlying machine learning models that underpin these technologies, are continually improved by annotating synthetic (AI-generated) and real-world data. Our employees play an important role in verifying a small portion of store visits by viewing recorded video clips rather than live video.»

Amazon will continue to use the technology in its smaller Go convenience stores, many of which it already uses. closed – and in its UK Fresh stores and also sold to retailers. Sainsburys, for example, tested the system in one of its stores. But the company's gradual withdrawal from its supermarkets is the latest sign that its efforts to shake up the grocery industry are failing.

Just Walk Out's technology relied heavily on human labor but failed to improve the customer experience. Photo: Holly Adams/Bloomberg

“Amazon learned the hard way that it can't reinvent the supermarket using only the technology it invented,” says Brittain Ladd, a former Amazon executive and consultant to the US supermarket chain Kroger.

Paul Foley, former Aldi's UK government boss and chief executive of Foley Retail Consulting, says Amazon has simply failed to make the technology cheaper than a regular supermarket.

«Amazon and all the operators who have copied the concept believe that this the idea is simply not financially viable,” he says.

“This technology can only maintain the identity of highly recognizable purchases, such as pre-packaged canned drinks or cake packages. This means the technology cannot identify the 5,000 different products that make up a typical convenience store.»

“This technology is still much more expensive than a typical convenience store. In fact, in my opinion, the entire concept was an advertisement or marketing tool for the innovation that the Amazon brand stands for. And it worked.»

An Amazon spokesperson said the technology can't detect only certain products.

Jeff Bezos said his company would move from online to mass production “only if we have a truly differentiated idea” 39; Photo: MICHAEL REYNOLDS/EPA-EFE/Shutterstock

One source involved in the opening of Amazon Fresh stores in the UK says technology that allows shoppers to avoid cashiers is simply not very attractive. “From my point of view, I just think it doesn't work. They offered Just Walk Out technology as a point of convenience and quick shopping, and it's a little strange… but is that what people want?

The source argues that Amazon should have paid more attention to traditional retail rules. “They haven’t established themselves as a brand, they don’t have a supply chain, they don’t have the support that the big supermarkets have. They are revolutionaries in a market that really cannot be disrupted.”

In the UK, Amazon has expanded and opened 20 Fresh stores, all in London, although it closed three last year. The stores use the same Just Walk Out technology that Amazon is winding down in the U.S. but also feature physical checkouts, highlighting the challenges the company has faced in changing consumer habits. Clive Black, an analyst at Shore Capital, says the company will have to make a Whole Foods-style acquisition to really make an impact on the market.

«Its progress in the grocery market hasn't been an outright success,» he says. “One wonders, despite much huffing and puffing and the Whole Foods acquisition, whether much progress has been made at all.”

Amazon's other traditional offerings are also gone. In 2018, the company opened a chain of «4-star» stores, so named because they only sold products with Amazon review scores of four stars or higher. The shelves had electronic price tags that updated review information in real time and allowed the company to offer discounts to Prime subscribers.

John Reilly, a former Amazon executive who worked on 4-star stores and is now an executive at digital consultancy Bounteous, says the stores were created to collect data that could improve Amazon's own website. “They wanted to know how people act in the real world. And is that different from how they operate in the digital world.»

Andy Jassy still has big plans for supermarkets, but lacks Bezos' «let's try this crazy thing and see what happens.» attitude Photo: Mike Blake/Reuters

In 2022, the company closed all of its 4-star stores, as well as other non-food stores such as bookstores. This comes less than a year after Bezos stepped down as CEO and was replaced by Amazon chief executive Andy Jassy. The new CEO has trimmed money-losing parts of the business, including ambitious projects that Bezos once pursued, such as video doctors and Alexa devices.

“Jeff always had this feeling of, 'Let's just try this crazy thing. and let's see what happens.» But Andy doesn’t have that,” says Reilly.

Jassy himself suggested that he still has big plans for supermarkets. Last year, he said the company was poised to «make big strides physically.» Instead, the company continued to close several Fresh and Go stores, as well as two clothing stores it had opened.

Last week, Jassy released his annual letter to shareholders, which has been read with religious interest during Bezos's tenure. time is responsible.

The letter was less than forthcoming about the future of the company's physical stores, instead suggesting that customers would be able to order milk and eggs online and have them arrive the same day instead of driving to them. local supermarket.

This is a potentially tempting proposition for buyers, but it suggests that the company's own stores are unlikely to be a priority. Amazon has spent nearly a decade trying to reinvent the supermarket; perhaps he has now decided that this is the one thing he cannot change.